The Ontario Superior Court of Justice (Commercial List) recently made some noteworthy observations about the evidentiary utility of fairness opinions in the context of arrangements. The decision may have implications for the disclosure of investment bankers’ fees and financial analysis underlying the fairness opinion. The decision, Re Champion Iron Mines Limited, arose out of the fairness hearing to approve the proposed acquisition of Champion Iron by Mamba Minerals.
In the BCE v. 1976 Debentureholders decision, the Supreme Court of Canada stated that “the presence of a fairness opinion from a reputable expert” is among the indicia of fairness in considering whether a proposed plan of arrangement is fair and reasonable. Accordingly, it is common practice in seeking court approval of an arrangement to note that a fairness opinion was obtained by a board of directors.
In this case, the Court had no difficulty concluding the arrangement was fair and reasonable for reasons including the substantial premium paid, the overwhelming shareholder approval and the extremely low level of dissent rights exercised. However, the court placed no weight on the fairness opinion in conducting its fairness analysis. The Court noted that shareholders considering the fairness opinion did not have disclosure of the fees payable to the advisor to assess how much work was performed and, further, the fairness opinion did not include any of the underlying financial analysis performed by the advisor.
The Court noted that the fairness opinion closely resembled the form of opinion typically rendered by financial advisors in arrangement contexts, and was careful to note that it was not concluding that the opinion lacked substantive supportive reasoning simply by reason of its not appearing in the body of the opinion. However, as an evidentiary matter, the Court concluded that the requirements of the Rules of Civil Procedure applicable to expert evidence were not met in this case due to the absence of reasons underpinning the opinion. As a result, the Court concluded that it could not place any weight on the fairness opinion in arriving at its fairness determination. The Court went on to state that the lack of supporting reasoning in the typical form of fairness opinion delivered in arrangement transactions renders them inadmissible for the purpose of asking the court to rely on their content in support of an arrangement order. Nonetheless, the Court proceeded to approve the arrangement on the basis of the ample evidence for finding fairness.
The ruling calls into question whether, in the future, courts will look for fairness opinions and disclosure documents that summarize fairness opinions to contain disclosure of the underlying financial analysis performed by, and fees paid to, bankers if the opinion is being put forward as evidence of the substantive fairness of the arrangement. Arguably, if the fairness opinion is not being put to the court as “expert evidence” of the substantive fairness of the arrangement, but rather as evidence to support the board’s business judgment and process, detailed disclosure should not be required.
It is important to note that the decision does not call into question the continued utility to a board of directors of receiving expert financial advice and fairness opinions from reputable financial advisors as an important part of the process by which directors discharge their duty of care and make informed decisions in the M&A context.
We note that the U.S. approach to disclosure is to require a fair summary of the substantive work performed by the board’s financial advisors, including valuation exercises and key assumptions underlying the fairness opinion. This decision may affect Canadian disclosure practice in the future. We will be actively monitoring how the Commercial Court deals with future arrangements, as well as whether the ruling results in a change in practice.